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Can OM Group Carve Out a More Stable Business?

Moving further away from basic mining is a risk today but holds potential for tomorrow.

Transitions are tricky, but sometimes they're necessary for a company to move along and deliver real value to shareholders. That may be worth keeping in mind as OM Group(NYSE:OMG) tries to navigate a new path in the coming years between being essentially a souped-up miner like Inco(NYSE:N) and a provider of specialty materials like Allegheny Technologies(NYSE:ATI) or Carpenter Technology(NYSE:CRS).

For now I'd say there's progress but a final success is not yet guaranteed. Revenue rose 5% this quarter, which actually isn't bad given the year-on-year decrease in cobalt prices and the fact that cobalt prices have long been a significant factor. In fact, overall specialty revenue (which cobalt is part of) rose 18% this quarter and segment profits were up strongly. With nickel, it was a more ironic performance -- sales were down 4% despite the strong ongoing price environment as volumes were down.

Without wanting to put words in management's mouth, I think the company will try to continue to move away from its reliance on raw metals. In its place, I would expect the company to focus more on metal-based specialty product applications for fields like rechargeable batteries, electronics, and water/pollution control. After all, that's ultimately a big part of what made Engelhard attractive to BASF(NYSE:BF) and garnered shareholders a nice little takeout price.

Given time and patience, this strategy could produce real value for shareholders. There isn't much value added in the mining sector. One company's copper is just as good as another's, and that makes it tough for companies to build any sort of competitive advantage outside of size and operating efficiency. Specialty materials, though, have the capability of being different enough to produce real returns. What's more, as OM Group seems likely to maintain its vertical integration, that should help mitigate the impact of price spikes and plunges that can afflict metal processors who don't control any part of their supply.

All of that said, that doesn't mean that you won't need some serious intestinal fortitude to hang on to these shares. Though this stock is barely followed, the nature of metals companies and today's economic uncertainty suggest a wild ride is probably in the cards. With that in mind, I'd be more inclined to buy on the dips instead of the peaks.